Federal Reserve Chairman Ben Bernanke said the U.S. economy is in a “severe contraction,' and added that unless a stabilization of the financial system occurs, the recession could last into 2010.


“If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view - - there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” Bernanke said in remarks to the Senate Banking Committee in Washington.


“Downside risks probably outweigh those on the upside,” Bernanke said today in his semiannual testimony on the economy, adding that the Fed’s own forecast was clouded by “considerable uncertainty.”


He did, however, open the door to optimism just a crack, saying that measures already taken by the Federal Reserve combined with the broad range of other fiscal and financial measures being put in place, will contribute to a gradual resumption of economic growth and improvement in labor-market conditions in a context of low inflation.


Bernanke said the “global nature of the slowdown” added to risks that U.S. exports and financial conditions could worsen. “Another risk derives from the destructive power of the so- called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing,” he said.


“Strong government action” will be required in order to stabilize markets and financial firms, Bernanke said.